Is it possible to be fired or dismissed from a company you founded or own shares in it for alleged gross misconduct (e.g. sexual harassment, fraud etc)?

Answer: Yes, subject to employer’s reason for the dismissal being fair, and the process being fair an employer can dismiss for misconduct or gross misconduct. Even as a shareholder or Founder, if your employer believes that you have breached your contract or acted in a way that would constitute “gross misconduct” (for example stealing from the company) then they will want to dismiss you from employment and any directorship role in the same way as they would for any other employee. The position with regards to your shares in such circumstances will depend on whether or not there is any shareholders’ agreement in place and the provisions of that agreement together with the company’s articles of association or constitution.

We often advise founders or director shareholders who have been accused of sexual harassment. Some opportunistic employers have framed even an objectively minor harassment accusation as gross misconduct to try to terminate the employee and relieve them of their shares as a bad leaver. We help protect their employment rights and shareholding legal rights, which are often neglected in such circumstances.

Gross Misconduct is misbehaviour so serious in the company’s view as to justify instant or summary dismissal. This type of dismissal may have fatal consequences for your shares and you will need employment and shareholder’s advice about any good/bad leaver provisions or the requirement to offer up your shares for sale possible at a nominal value. What constitutes gross misconduct varies depending on the employer and the employer’s role.

Most employers have formal workplace disciplinary rules in the employment contract or a Disciplinary Policy which identify unacceptable behaviours such as harassment, discrimination, fraud or dishonesty are often part of a non-exhaustive list of very serious misconduct

Importantly, the onus is for the employer to show that conduct was actually the reason for dismissal (ie not that there is an underlying shareholders’ political battle or boardroom dispute). For the purposes of establishing the reason for dismissal, the employer only needs to have a genuine belief in the employee’s misconduct; the belief may ultimately be proven wrong.

As an employee/shareholder you have valuable rights under employment law. So if the company is not willing to make a reasonable financial offer, there are often important strategic reasons for remaining in employment for as long as possible. So although a protracted exit process as a shareholder/employee may be stressful, it can be beneficial in the long run.

A vital part of this disciplinary (or exit) process for employee/shareholders facing even the most serious misconduct allegations is that there is a balanced and thorough investigation before any internal disciplinary hearing on the allegation. Employee/shareholders and founders have the right to an investigation even if the allegation is extremely serious or they supposedly have been caught red-handed. The company should not just rubber stamp an allegation of misbehaviour and hurtle towards a disciplinary hearing (as it is a short step from a disciplinary to a termination letter for cause which may also constitute bad leaver status).

This investigation process can be a vital tool to flush out exculpatory evidence demonstrating that the alleged misbehaviour does not truly justify dismissal, perhaps another sanction such as a warning would be more appropriate. And/or that the employer is not following the government’s fair dismissal protocols (see Code of Practice on disciplinary and grievance procedures | Acas) or otherwise is breaching your valuable employment legal rights for which you should be compensated.

Although the legal test is that an employer must hold such investigation as is “reasonable in all the circumstances” this is a fluid test. These rights are not connected to your shares and the fact that you are also a shareholder will be irrelevant in this process. Your employment rights as a founder/shareholder are important as it has been established that this disciplinary investigation should be especially rigorous when the disciplinary charges are particularly serious (such as gross misconduct) or there would be a far-reaching adverse impact on the person accused. This is reiterated by ACAS’s guide Acas guide to discipline and grievances at work | Acas which has the common sense approach that the more serious the allegation, the more thorough the level of investigation required. As a point of natural justice this must be correct, there should be even higher standards of an investigation depending on whether the sanction is the employment equivalent of a slap on the wrists or the gallows. An accusation should not be sufficient to justify termination of employment without a reasonable investigation (and credible evidence).

A founder or shareholder can be lawfully dismissed for misconduct, but if an employee they will also have underlying employment rights entitling them to a fair process and also legitimate and lawful reason for any exit. There are only 5 lawful reason when an employer can dismiss an employee including conduct and performance. The UK requires that the employer follows the appropriate misconduct procedure on any such dismissal, or it will be an unfair dismissal.

The employment rights include statutory and contractual rights which often are wedded with the shareholding rights and whether the shareholders’ arrangements in place deal with such circumstances as set out below.

The employer also must comply with your contractual rights (notice length or other payments in the service agreement or other employment contractual agreements). If the dismissal is unfair or unlawful then there is the potential for compensation and damages for breaching the contractual rights (including breaches of the employment or shareholders’ agreements.)

• Overview of Employment compensation regime

Regarding your employment rights, you are entitled to receive payments as outlined in your contractual documentation. The contract usually stipulates that there is a gross misconduct situation then no notice or bonuses will be paid. Employment usually ends as of the date of the gross misconduct termination letter.

The optimal outcome is often achieved through a negotiated termination package between the parties or via lawyers. In situations where an agreed exit permits mutual termination, your financial package typically encompasses all contractual entitlements as well as ex-gratia payments made in recognition of goodwill. Frequently, such arrangements include jointly approved internal or external announcements, references, and agreed-upon termination dates. During “without prejudice” or “Protected Conversations” negotiations (conducted off the record) the parties have the opportunity to collaboratively determine commercial and financial terms to resolve any potential disputes.

Payments provided to employees generally take into account contractual rights, losses likely to be incurred by the employee, the financial circumstances of the organisation, and occasionally, reputational or other commercial considerations. Employees’ losses may be assessed under the prevailing employment regime governing compensation for loss of office or anticipated future losses.

• Employment Compensation position to 31 December 2026

Until 31 December 2026, there is a government maximum compensatory cap on the award for unfair dismissal in the UK which is parsimonious for most senior executives who are shareholders/founders. This cap is currently as of 6 April 2025 capped at £118,223, or 52 weeks’ gross pay, whichever is lower. This cap changes incrementally each financial year. There is also a modest basic award.

• Employment Compensation position from 1 January 2027

From 1 January 2027, as a result of the Employment Rights Act the UK Government has announced:

• protection against unfair dismissal will be granted as a right after six months of employment. Currently, employees must have completed two years with their employer before being eligible to claim unfair dismissal.
• the cap on compensatory awards for unfair dismissal (52 weeks or £118,223 from 2025) will be lifted, allowing senior executives to claim full employment losses without limits.

Employees also have unlimited compensation if they are dismissed/discriminated for a protected characteristic or blowing the whistle on unlawful/criminal behaviours. This is in addition to the other legal rights including contractual rights in the service agreement or employment contract and/or shareholders agreements. As such potential discrimination and/or protected disclosure claims (whistleblowing) are particularly important to explore if you are a Founder/Shareholder and employee as your compensation from such detriment or retaliation may be very significant.

Alongside legal advice, employees should also seek tax guidance to avoid unexpected tax liabilities on compensation or share payments.

The process and the financial or legal consequences will depend on their positions (shareholder, a director, and any other position they hold) and the specific contractual terms. One of the most important terms will be in your Shareholders’ Agreement or articles of association. These will state when you may retain your shares when you leave employment. Often the good leaver/bad leaver clause will provide that the “good leavers” (per the defined terms) retain the sharers or receive fair value for them. Any “bad leavers” (which typically will be triggered if the employee is dismissed for “Cause” or misconduct etc or they resign) may require the shares to be transferred for a nominal purchase price.

If there are no shareholder’ agreements or applicable provisions in place then the employee may be in a strong position with regards to their shareholding even if they are subsequently dismissed as an employee. For this reason any negotiation regarding their shareholding and their position as an employee tend to run together.

If you are a minority shareholder the company will need to have consideration to the provisions of the Companies Act that protects you against being singled out for any unfairly prejudicial actions.

The position for a CEO (or any other C-Suite level employee) will be the same for any other director who is also an employee. Termination of your position as a CEO will be regulated by the articles of association, your Company Handbook, your contract of employment, and your statutory rights. So long as the company follows their termination procedure, and do not dismiss you for an unfair, discriminatory, or reason related to whistleblowing, then they can terminate your contract.

In my professional experience, some companies (shareholders/investors) try to take advantage of a potential allegation of misconduct to seek to force a senior employee or even founder to forfeit their valuable shares or force them to negotiate an exit from a position of vulnerability and weakness. With some of my clients the allegation has been fabricated. With other clients there has been some basis to the misconduct allegation but the company (investors/shareholders) have addressed it in a disproportionate and unfair manner, forgetting the underlying valuable employment rights including due process, not to be unfairly dismissed and various implied legal rights.

In addition to your shareholding rights, you may also have substantial rights as employee, particularly if you have been employed for long enough to have “unfair dismissal rights” (currently at least 2-years employment).

It is important to immediately tell your employment advisor that you are also a shareholder with the employer or wider group if you have been accused of misconduct or are being forced from your employment or directorship. This will impact the strategy and legal landscape.

Please speak to the Shareholder/Employee Disputes team: Caroline Doran Millett [email protected], Richard Pull [email protected] or Paul Dorrans [email protected]